Reforms in Indian Telecom Sector

By

Rakesh Kumar Sharma

Senior Lecturer of Management
R.K. Yadav
Senior Lecturer of Management
Ansal Institute of Technology
Gurgaon
 

INSTITUTIONAL HISTORY OF THE TELECOM SECTOR IN INDIA

The telegraph act of 1885 governed the telecommunications sector. Under this act, the government was
in-charge of policymaking and provision of services . Major changes in telecommunications in India began
in the 1980s. Under the Seventh Plan (1985-90), 3.6 percent of total outlay was set aside for
communications and since 1991, more than 5.5 percent is spent on it (Figure 1).  The initial phase of
telecom reforms began in 1984 with the creation of Center for Department of Telematics (C-DOT) for
developing indigenous technologies and private manufacturing of customer premise equipment. Soon
after, the Mahanagar Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL) were
set up in 1986. The Telecom Commission was established in 1989.

When telecom reforms were initiated in 1994, there were three incumbents in the fixed service sector,
namely DoT (Department of Telecom), MTNL and VSNL. Of these, DoT operated in all parts of the country
except Delhi and Mumbai. MTNL operated in Delhi and Mumbai and VSNL provided international
telephony. 

Given its all-India presence and policy-making powers, the DoT enjoyed a monopoly in the telecom sector
prior to the major telecom reforms. However, subsequent to the second phase of reforms in 1999, which
included restructuring the DoT to ensure a level playing field among private operators and the incumbent,
the service-providing sector of DoT was split up and called Department of Telecom Services (DTS). DTS
was later corporatized and renamed Bharat Sanchar Nigam Limited (BSNL). This meant separation of the
incumbent service provider from the policy-maker. Broadly, DoT is now responsible for policy-making,
licensing and promotion of private investments in both telecom equipment and manufacture and provision
of telecom services. BSNL, a corporate body, is responsible for the provision of services.

A crucial aspect of the institutional reform of the Indian telecom sector was setting up of an independent
regulatory body in 1997 – the Telecom Regulatory Authority of India (TRAI), to assure investors that the
sector would be regulated in a balanced and fair manner. TRAI has been vested with powers to ensure its
independence from the government. The government has retained the licensing function with itself. The
main issue with respect to licensing has not been whether it should be with the regulator but that the
terms and conditions of licensing should involve consultations with TRAI to ensure transparency in the
bidding process Some of the main functions of TRAI include fixing tariffs for telecom services, dispute-
settlement between service providers, protecting consumers through monitoring of service quality and
ensuring compliance to license conditions, setting service targets and pricing policy for all operators and
service providers.

Further changes in the regulatory system took place with the TRAI Act of 2000 that aimed at restoring
functional clarity and improving regulatory quality. TRAI can frame regulations and can levy fees and
charges for telecom services as deemed necessary.  The regulatory body also has a separate fund (called
the TRAI General Fund) to facilitate its functioning. To fairly adjudicate any dispute between licensor and
licensee, between service provider, between service provider and a group of consumers, a separate
disputes settlement body was set up called Telecom Disputes Settlement and Appellate Tribunal (TDSAT).

Telecommunications is the transmission of data and information between computers using a

communications link such as a standard telephone line. Typically, a basic telecommunications system
would consist of a computer or terminal on each end, communication equipment for sending and receiving
data, and a communication channel connecting the two users. Appropriate communications software is
also necessary to manage the transmission of data between computers. Some applications that rely on
this communications technology include the following:

Electronic mail (e-mail) is a message transmitted from one person to another through computerized
channels. Both the sender and receiver must have access to on-line services if they are not connected to
the same network. E-mail is now one of the most frequently used types of telecommunication.

Facsimile (fax) equipment transmits a digitized exact image of a document over telephone lines. At the
receiving end, the fax machine converts the digitized data back into its original form.

Voice mail is similar to an answering machine in that it permits a caller to leave a voice message in a voice
mailbox. Messages are digitized so the caller's message can be stored on a disk.

Videoconferencing involves the use of computers, television cameras, and communications software and
equipment. This equipment makes it possible to conduct electronic meetings while the participants are at
different locations.

The Internet is a continuously evolving global network of computer networks that facilitates access to
information on thousands of topics. The Internet is utilized by millions of people daily.

Actually, telecommunications is not a new concept. It began in the mid-1800s with the telegraph, whereby
sounds were translated manually into words; then the telephone, developed in 1876, transmitted voices;
and then the teletypewriter, developed in the early 1900s, was able to transmit the written word.

Since the 1960s, telecommunications development has been rapid and wide reaching. The development of
dial modem technology accelerated the rate during the 1980s. Facsimile transmission also enjoyed rapid
growth during this time. The 1990s have seen the greatest advancement in telecommunications. It is
predicted that computing performance will double every eighteen months. In addition, it has been
estimated that the power of the computer has doubled thirty-two times since World War II (With row,
1997). The rate of advancement in computer technology shows no signs of slowing. To illustrate the
computer's rapid growth, Ronald Brown, former U.S. secretary of commerce, reported that only fifty
thousand computers existed in the world in 1975, whereas, by 1995, it was estimated that more than fifty
thousand computers were sold every ten hours (U.S. Department of Commerce, 1995).

Deregulation and new technology have created increased competition and widened the range of network
services available throughout the world. This increase in telecommunication capabilities allows businesses
to benefit from the information revolution in numerous ways, such as streamlining their inventories,
increasing productivity, and identifying new markets. In the following sections, the technology of modern
telecommunications will be discussed.

Progress of reforms
a. Private Participation in Telecom - For the provision of basic services, the entire country was divided into
21 telecom circles, excluding Delhi and Mumbai (Singh et. al. 1999). With telecom markets opened to
competition, DoT and MTNL were joined by private operators but not in all parts of the country. By mid-
2001, all six of the private operators in the basic segment had started operating (Table 1). Table 2 shows
the number of village public telephones issued by private licensees by 2002.

After a recent licensing exercise in 2002, there exists competition in most service areas. However, the
market is still dominated by the incumbent. In December 2002, the private sector provided approximately
10 million telephones in fixed, WLL (Wireless Local Loop) and cellular lines compared to 0.88 million
cellular lines in March 1998 (DoT Annual Report, 2002). 72 per cent of the total private investment in
telecom has been in cellular mobile services followed by 22 per cent in basic services. After the recent
changes, the stage is now set for greater competition in most service areas for cellular mobile Over time,
the rise in coverage of cellular mobile will imply increased competition even for the basic service market
because of competition among basic and cellular mobile services.

b. Teledensity and Village Public Phones (VPTs) - India's rapid population increase coupled with its
progress in telecom provision has landed India's telephone network in the sixth position in the world and
second in Asia (ITU). The much publicized statistic about telecom development in India is that in the last
five years, the lines added for basic services is 1.5 times those added in the last five decades! The annual
growth rate for basic services has been 22 percent and over 100 percent for internet and cellular
services.  As Dossani (2002) argues, the comparison of teledensity of India with other regions of the world
should be made keeping in mind the affordability issues. Assuming households have a per capita income
of $350 and are willing to spend 7 percent of that total income on communications, then only about 1.6
percent of households will be able to afford $30 (for a $1000 investment per line).

Teledensity has risen to 4.9 phones per 100 persons in India compared to the average 7.3 mainlines per
100 people around the world. Figure 2 shows the growth rate of fixed and cellular mobile subscription
between 1998 and 2002. Although, the coverage is still much higher in urban areas - 13.7 in urban areas
compared to1.4 in rural areas, the government has made efforts to connect villages through village public
telephones (VPT) and Direct Exchange Lines (DEL). This coverage increased from 4.6 lakhs in March 2002
to 5.10 lakhs in December 2002 for VPT and from 90.1 lakhs in March to 106.6 lakhs in December 2002
for DELs. BSNL has been mainly responsible for providing VPTs; more than 84 percent of the villages were
connected by 503610 VPTs with private sector also providing 7123 VPTs .

The overall telecom growth rate is likely to be high for some years, given the increase in demand as
income levels rise and as the share of services in overall GDP increases. The growth rate will be even
higher due to the price decrease resulting from a reduction in cost of providing telecom services. A
noteworthy feature of the growth rate is the rapid rate at which the subscriber base for cellular mobile has
increased in the last few years of the 1990s, which is not surprising in view of the relatively lower
subscriber base for cellular mobile.

c. Foreign Participation – India has opened its telecom sector to foreign investors up to 100 percent
holding in manufacturing of telecom equipment, internet services, and infrastructure providers (e-mail and
voice mail), 74 percent in radio-paging services, internet (international gateways) and 49 percent in
national long distance, basic telephone, cellular mobile, and other value added services (FICCI, 2003).
Since 1991, foreign direct investment (FDI) in the telecom sector is second only to power and oil - 858
FDI proposals were received during 1991-2002 totaling Rs. 56,279 crores (Figure 4) (DoT Annual Report,
2002). Foreign investors have been active participants in telecom reforms even though there was some
frustration due to initial dithering by the government. Until now, most of the FDI has come in the cellular
mobile sector partly due to the fact that there have been more cellular mobile operators than fixed service
operators. For instance, during the period 1991-2001, about 44 percent of the FDI was in cellular mobile
and about 8 percent in basic service segment. This total FDI includes the categories of manufacturing and
consultancy and holding companies

d. Tariff-setting - An essential ingredient of the transition from a protected market to competition is the
alignment of tariffs to cost-recovery prices. In basic telecom for example, pricing of the kind that prevailed
in India prior to the reforms, led to a high degree of cross-subsidization and introduced inefficient
decision-making by both consumers and service-providers. Traditionally, DoT tariffs cross-subsidized the
costs of access (as reflected by rentals) with domestic and international long distance usage charges
(Singh et. al. 1999). Therefore, re-balancing of tariffs - reducing tariffs that are above costs and
increasing those below costs - was an essential pre-condition to promoting competition among different
service providers and efficiency in general.

TRAI issued its first directive regarding tariff-setting following NTP 99 aimed at re-balancing tariffs and to
usher in an era of competitive service provision. Subsequently, it conducted periodic reviews and made
changes in the tariff levels, if necessary. Table 4 shows the current level of telephone charges in India
effective from January, 2003. Re-balancing led to a reduction in cross-subsidization in the fixed service
sector. Cost based pricing, a major departure from the pre-reform scenario, also provides a basis for
making subsidies more transparent and better targeted to specific social objectives, e.g. achieving the
USO.

e. Service Quality - One of the main reasons for encouraging private participation in the provision of
infrastructure rests on its ability to provide superior quality of service. In India, as in many developing
countries, low teledensity resulted in great emphasis being laid on rapid expansion often at the cost of
quality of service. One of the benefits expected from the private sector's entry into telecom is an
improvement in the quality of service to international standards. Armed with financial and technical
resources, and greater incentive to make profits, private operators are expected to provide consumers
value for their money. Telephone faults per 100 main lines came down to 10.32 and 19.14 in Mumbai and
Delhi respectively in 2002-03 compared to 11.72 and 26.6 in 1997-98 (Figures 6 and 7). Quality of service
was identified as an important reform agenda and TRAI has devised QOS (Quality of Service) norms that
are applicable across the board to all operators (Singh et. al. 1999).   

Pre reform period and Telecommunication in India

Before 1990's Telecommunication services in India were complete government Monopoly - the
Department of Telecommunication (DoT). Government also retained the rights for manufacturing of
Telecommunication equipments. MTNL and VSNL were created in the year 1986.Early 1990's saw initial
attempts to attract private investment. Telecommunication equipment manufacturing was deli censed in
the year 1991.

A notable revolution has occurred in the telecom sector. In the pre reforms era, this was entirely in the
hands of the central government and due to lack of competition, the call charges were quite high. Further,
due to lack of funds with the government, the government could never meet the demand for telephones.
In fact, a person seeking a telephone connection had to wait for years before he could get a telephone
connection. The service rendered by the government monopoly was also very poor. Wrong billing,
telephones lying dead for many days continuously due to slackness on the part of the telecom staff to
attend to complaints, cross connections due to faulty / ill maintained telephone lines, obsolete instruments
and machinery in the telephone department were the order of the day in the pre reforms era.

Today, there are many players in the telecom sector. The ultimate beneficiary has been the consumer.
Prices of services in this sector have fallen drastically.

Telephone connections are today affordable to everyone and are also easily available. Gone are the days,
when one had to wait for years to get a telephone connection. The number of telephone connections which
was only 2.15 million (fixed lines) in 1981 increased to 5.07 million(fixed lines) in 1991. Today (as in
2003), there are 54.62 million telephone connections of which 41.33 million are fixed line telephone
connections, 12.69 million are cellular mobiles and the remaining 0.60 million are WLL telephones1.
Wireless in Local Loop (WLL) telephones and cellular mobile telephones were unknown in India a few years
ago. Cell phones charges have come down so much that today one can see even a common man going
around with a cell phone in his hand. The private companies are giving various incentives to attract
customers, a situation which is entirely opposite to the conditions prevailing in the pre reforms era when
one had to wait for years to get a telephone connection.

The first step toward deregulation and beginning of liberalization and private sector participation was the
announcement of National Telecom Policy 1994.NTP 1994 , for the first time, allowed private/foreign
players to enter the 'basic' and the 'new cellular mobile section. FDI up to  49%  of total  equity was also
allowed in these sectors. The policy allowed one private service provider to compete in basic services with
the incumbent DoT in each DoT internal circle. It allowed duopoly in cellular mobile services in each circle.
As part of the implementation of the NTP 94, licenses were issued against license fees through a bidding
process. This policy initiated the setting up of an independent regulator–the Telecom Regulatory Authority
of India (TRAI), which was established in 1997. The main objective of TRAI is to provide an effective
regulatory framework to ensure fair competition while, at the same time, protect the interest of the
consumers.

Liberalization and reforms in Telecom sector since early 1990's till date are briefed below:

1991-92:

1. On 24th July 1991, Government announced the New Economic Policy.

2. Telecom Manufacturing Equipment license was delicensed in 1991.
3. Automatic foreign collaboration was permitted with 51 per cent equity by the collaborator.

1992-93:

Value added services were opened for private and foreign players on franchise or license basis. These
included cellular mobile phones, radio paging, electronic mail, voice mail, audiotex services, videotex
services, data services using VSAT's, and video conferencing.

1994-95:

1. The Government announced a National Telecom Policy 1994 in September 1994. It opened basic
telecom services to private participation including foreign investments.
2. Foreign equity participation up to 49 per cent was allowed in basic telecom services, radio paging and
cellular mobile. For value added services the foreign equity cap was fixed at 51 per cent.
3. Eight cellular licensees for four metros were finalized.

1996-97:

1. TRAI was set up as an autonomous body to separate the regulatory functions from policy formulations
and operational functions.
2. Coverage of the term "infrastructure" expanded to include telecom to enable the sector to avail of fiscal
incentives such as tax holiday and concessional duties.
3. An agreement between Department of Telecommunication (DoT) and financial institutions to facilitate
funding of cellular and basic telecom projects.
4. External Commercial Borrowing (ECB) limits on telecom projects made flexible with an increased share
from 35 per cent to 50 per cent of total project cost.
5. Internet Policy was finalized.

1998-99:

FDI up to 49 per cent of total equity, subject to license, permitted in companies providing Global Mobile
Personal Communication (GMPC) by satellite services.

1999-00

1. National Telecom Policy 1999 was announced which allowed multiple fixed Services operators and
opened long distance services to private operators.
2. TRAI reconstituted: clear distinction was made between the recommendatory and regulatory functions
of the Authority.
3.  DOT/MTNL was permitted to start cellular mobile telephone service.
4. To separate service providing functions from policy and licensing functions, Department of Telecom
Services was set up.
5. A package for migration from fixed license fee to revenue sharing offered to existing cellular and basic
service providers.
6. First phase of re-balancing of tariff structure started. STD and ISD charges were reduced by 23 per cent
on an average.
7. Voice and data segment was opened to full competition and foreign ownership increased to 100 per
cent from 49 per cent previously.

2000-01:

1. TRAI Act was amended. The Amendment clarified and strengthened the recommendatory power of
TRAI, especially with respect to the need and timing of introduction of new services provider, and in terms
of licenses to a  services provider.
2. Department of Telecom Services and Department of Telecom operations corporatized by creating
Bharat Sanchar Nigam Limited.
3. Domestic long distance services opened up without any restriction on the number of operators.
4. Second phase of tariff rationalization started with further reductions in the long distance STD rates by
an average of 13 per cent for different distance slabs and ISD rates by 17 per cent.
5. Internet Service Providers were given approval for setting up of International Gateways for Internet
using satellite as a medium in March 2000.
6. In August 2000, private players were allowed to set up international gateways via the submarine cable
route.
7. The termination of monopoly of VSNL in International Long Distance services was antedated to March
31, 2002 from March 31, 2004.

2001-02:

1. Communication Convergence Bill, 2001 was introduced in August 2001. 

2. Competition was introduced in all services segments. TRAI recommended opening up of market to full
competition and introduction of new services in the telecom sector. The licensing terms and conditions for
Cellular Mobile were simplified to encourage entry for operators in areas without effective competition.
3. Usage of Voice over Internet Protocol permitted for international telephony service.
4. The five-year tax holiday and 30 per cent deduction for the next five years available to the
telecommunication sector till 31st March 2000 was reintroduced for the units commencing their operations
on or before 31st  March 2003. These concessions were also extended to internet services providers and
broadband networks.
5. Thirteen ISP's were given clearance for commissioning of international gateways for Internet using
satellite medium for 29 gateways.
6. License conditions for Global Mobile Personal Communications by Satellite finalized in November 2001.
7. National Long Distance Service was opened up for unrestricted entry with the announcement of
guidelines for licensing NLD operators. Four companies were issued Letter of Intent (LOI) for National
Long Distance Service of which three licenses have been signed.
8. The basic services were also opened up for competition. 33 Basic Service licenses (31 private and one
each to MTNL and BSNL) were issued up to 31stDecember 2001.
9. Four cellular operators, one each in four metros and thirteen were permitted with 17 fresh licenses
issued to private companies in September/October 2001. The cell phone providers were given freedom to
provide, within their area of operation, all types of mobile services equipment, including circuit and/or
package switches that meet the relevant International Telecommunication Union (ITU)/ Telecom
Engineering Centre (TEC) standards.
10. Wireless in Local Loop (WLL) was introduced for providing telephone  connection in urban, semi-urban
and rural areas.
11. Disinvestment of PSU's in the telecom sector was also undertaken during the year. In February 2002,
the disinvestment of VSNL was completed by bringing down the government equity to 26 per cent and the
management of the company was transferred to Tata Group, a strategic partner. During the year, HTL was
also disinvested.
12. Government allowed CDMA technology to enter the Indian market.
13. Reliance, MTNL and Tata were issued licenses to provide the CDMA based services in the country.
14. TRAI recommended deregulating regulatory intervention in cellular tariffs, which meant that operators
need no longer have prior approval of the regulator for implementing tariff plans except under certain
conditions.

2002-03

1.  International long distance business opened for unrestricted entry.

2.  Telephony on internet permitted in April 2002.
3.  TRAI finalized the System of Accounting Separation (SAS) providing detailed accounting and financial
system to be maintained by telecom service providers.

2003-04

1. Unified Access Service Licenses regime for basic and cellular services was introduced in October 2003.
This regime enabled services providers to offer fixed and mobile services under one license. Consequently
27 licenses out of 31 licenses converted to Unified Access Service Licenses.
2. Interconnection Usage Charge regime was introduced with the view of providing termination charge for
cellular services and enable introduction of Calling Party Pays regime in voice telephony segment.
3. The Telecommunication Interconnection Usage Charges Regulation 2003 was introduced on 29th
October 2003 which covered arrangements among service providers for payment of Interconnection Usage
Charges for Telecommunication Services and covered Basic Service that includes WLL (M) services,
Cellular Mobile Services, and Long Distance Services (STD/ISD) throughout the territory of India
4. The Universal Service Obligation fund was introduced as a mechanism for transparent cross
subsidization of universal access in telecom sector. The fund was to be collected through a 5 per cent levy
on the adjusted gross revenue of all telecom operators.
5. Broadcasting notified as Telecommunication services under Section 2(i)(k) of TRAI Act.

2004-05:

1. Budget 2004-05 proposed to lift the ceiling from the existing 49 per cent to 74 per cent as an incentive
to the cellular operators to fall in line with the new unified licensing norm.
2. 'Last Mile' linkages permitted in April 2004 within the local area for ISP's for establishing their own last
mile to their customers.
3.  Indoor use of low power equipments in 2.4 GHz band de-licensed from August 2004.
4. Broadband Policy announced on 14th October 2004. In this policy, broadband had been defined as an
"always-on" data connection supporting interactive services including internet access with minimum
download speed of 256 kbps per subscriber.
5. The Telecommunications (Broadcasting and Cable Services) Interconnection Regulation 2004 was
introduced on 10th December 2004.
6.  BSNL and MTNL launched broadband services on 14th January 2005.
7. TRAI announced the reduction of Access Deficit Charge (ADC) by 41 per cent on ISD calls and by 61 per
cent on STD calls which were applicable from 1st February 2005.

2005-2006

1. Budget 2005-2006 cleared a hike in FDI ceiling to 74 per cent from the earlier limit of 49 per cent. 100
per cent FDI was permitted in the area of telecom equipment manufacturing and provision of IT enabled
services.
2.  Annual license fee for National Long Distance (NLD) as well as International Long Distance (ILD)
licenses reduced to 6 per cent of Adjusted Gross Revenue (AGR) with effect from 1st January 2006.
3. BSNL and MTNL launched the 'One-India Plan' with effect from 1st March 2006 which enable the
customers of BSNL and MTNL to call from one end of India to other at the cost of Rs. 1 per minute, any
time of the day to phone.
4. TRAI fixed Ceiling Tariff for International Bandwidth, Ceiling Tariff for higher capacities reduced by
about 70 per cent and for lower capacity by 35 per cent.
5.  Regulation on Quality of Service of Basic and Cellular Mobile Telephone Services 2005 introduced on
1st July 2005.
6.  BSNL announced 33 per cent reduction in call charges for all the countries for international calls.
7. Quality of Service (Code of Practice for Metering and Billing Accuracy) Regulation 2006 introduced on
21st March 2006.

11th plan (2007-20012)

FDI in Telecom sector has increased in recent years with value of 81.62 billion with share of 10% in total
inflow during January 2000 to June 2005. This is mainly in telecom services and not in telecom
manufacturing sector. Therefore, it is essential to enhance the prospect for inflow of increased funds. The
NTP 1999 sought to promote exports of telecom equipments and services. But till date export of telecom
equipment remains minimal. Most of the state-of-the-art telecom equipments including mobile phones are
imported from abroad. There is thus immense potential for indigenous manufacturing in India. Certain
measures like financial packages, formation of a telecom export promotion council, creation of integrated
facilities for telecom equipment through SEZ and encouraging overseas vendors to set up facilities in
India, are required for making India a hub for telecom equipment manufacturing and attract FDI. The
telecom sector has shown robust growth during the past few years. It has also undergone a substantial
change in terms of mobile versus fixed phones and public versus private participation. The following table
and discussions from the report of the  working report on the telecom sector for the 11th plan (2007-
2012)will show the growth of  telecom sector since 2003:

Conclusion

Telecommunications is one of the fastest-growing areas of technology in the world. Because of its rapid
growth, businesses and individuals can access information at electronic speed from almost anywhere in
the world. By including telecommunications in their operations, businesses can provide better services and
products to their customers. For individuals, telecommunications provides access to worldwide information
and services.